Dow 10,000 is a Sad Milestone

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Last Wednesday, October, 14, 2009, the Dow Jones Industrials closed above 10,000 and this milestone was met with the predictable cheerleading among the financial media.

But what was conveniently overlooked in all the hoopla was the sobering fact that the first time the Dow crossed 10,000, the date was October 15, 1999, just one daylater and ten years earlier in what could only be described as an eerie coincidence.

And so, in my opinion, this “milestone” was nothing to celebrate because buy and hold investors have lost ten years of their investment lives; not to mention that when you factor inflation into the matrix, the rate of return is profoundly negative. 

But in spite of the cheerleading, the average retail investor has figured this out and has responded by pouring an extraordinary more than $200 Billion into bond funds this year compared to $15 Billion in stock funds as they seek safety and some sort of rate of return.

But I’m concerned that many of these people who got out at the bottom of the bear market are now setting themselves up for a double hit.  With interest rates near zero, the next move has to be up, and when interest rates rise, the NAV of bond funds declines and so it’s quite likely that this flight to bond funds could generate significant losses ahead.

With this week’s burst above 10,000 and then Friday’s fallback, the question remains the same, “Can this year’s fireworks continue?”

Of course no one has a crystal ball but Dow 10,000 was an obvious target and some backpedaling would not come as a surprise.  With 3^rd Quarter earnings down -23% from a year ago, a significantly overbought market and continued weakness in the consumer sector, some retrenchment would be in order and even welcome.

For followers of Fibonacci theory, 1121 on the S&P 500 marks a 50% retracement of the difference between the October, 2007, high and the March lows.  Typically this level marks serious resistance and a possible turning point and so we’ll have to see if that materializes.

With warning flags all around, we expect choppy prices ahead.  A decline below 1060 on the S&P would indicate further weakness ahead while short term resistance is at 1100 and so a break above there would open the door to higher highs.

The View from 35,000 Feet

The news was mixed this week as GE, IBM and Bank of America earnings disappointed, while Intel, Google and JP Morgan brought in some feel good numbers.

To date 3^rd Quarter earnings are down -23% from a year ago, the ninth straight quarter of declines, and the onslaught of reports will continue this week with notable reports expected from Apple, Texas Instruments and Zions Bank on Monday, Coke, Yahoo, Caterpillar and DuPont on Tuesday, Boeing, Wells Fargo and Morgan Stanley on Wednesday, CIT, Dow Chemical and American Express on Thursday and Microsoft, Whirlpool and Honeywell on Friday.

On Friday, consumer confidence took an unexpected drop to 69.4 from the prior reading of 73.5 and a consensus estimate of 73.3.  As the consumer goes, so goes the economy; so this is not a good number by any measurement.

On the home front, MGIC, the largest US mortgage insurer, got clipped for a 12% drop in its stock price as more homeowners head for default and foreclosure.   RealtyTrac reported over 900,000 foreclosures for the 3^rd Quarter, up 23% from a year ago, and equating to 1 out of every 136 dwellings in America being somewhere in the foreclosure process.

The U.S. budget deficit came in at $1.4 Trillion for 2009, up from $455 Billion for 2008, as we continue spending money we don’t have and tagging our kids and grandkids with the bill.

The Week Ahead

Tuesday: September Building Permits, September Housing Starts, September Producer Price Index

Wednesday: Fed. Beige Book

Thursday: Weekly Jobless Numbers, September Leading Economic Indicators

Friday: September Existing Home Sales

Sector Spotlight:

Leaders:  Oil, Commodities

Laggards: Real Estate, Japan, Silver

It’s a beautiful autumn weekend in Bend as the aspens change and there’s new snow on Mt. Bachelor.  Leaves are blowing in the streets and the Canadian geese are packing up and heading south.  We get a lot of unusual birds at our feeders on the deck this time of year as the fly lanes south get busy, and if you’re a snow bird, as well, I envy you.  This is the first year I can remember that I haven’t been really excited about ski season and the first snowfalls.  Must be getting old, I guess.

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Best Wishes,

John

John Nyaradi

Publisher

Wall Street Sector Selector

All information presented herein is for general information only and deemed to be from reliable sources, but we cannot guarantee its accuracy. Readers are strongly advised to check with their investment counselors before making any investment. There is risk of loss in all investment activity.